Gas key issue as Ukraine, Russia look to restart relations

Russia seems unlikely to significantly lower the price Ukraine has to pay for gas as the Ukrainian Prime Minister held talks with Gazprom and Vladimir Putin in Moscow.

The Russian Prime Minister did promise to re-start negotiations on gas prices, but he insisted the current contract was fair and balanced. Ukraine’s new PM Nikolay Azarov said that the countries should start from a clean slate since the election of Viktor Yanukovich.

“I believe that we should let bygones be bygones, forget many things that occurred over the past five years of relations between our countries, turn the page and start from scratch and at the same time build up from the rich experience that we have.”

The new chapter in relations has begun more or less where the old one left off, with gas. It is an issue that previously proved to be divisive and a source of mistrust in relations between the two countries. Ukraine wants to once again renegotiate the existing gas agreement. It says the market price of $305 per thousand cubic meters is too much of a burden.

“This year Ukraine is paying full market price. On top of it, the linkage to Italian refined products basket made the effective price Ukraine is paying now one of the highest in Europe of course Ukraine is not very happy to pay such a high price,” says Vitaly Ermakov from Cambridge Energy Research Associates.

In an effort to slash the tariff Ukraine proposed to sell control over its national gas pipeline system to an international consortium which will include Russian and European countries. It’s also offering Russia direct access to its domestic gas market.

But so far Russia has been reluctant to put anything more on the table, saying it’s already reduced gas sales volumes for Ukraine this year.

“Proposal that Ukraine hinted at making in granting a concession to Russia and some European countries for use of its gas transit network is an interesting proposition but it’s not even as attractive as a very similar proposal that was made in 2002,” added Ermakov.

Attitudes may have changed, with scowls being replaced by smiles. But business is business and Russia says for now it’s completely satisfied with the existing gas contract and any further concessions would have to be carefully thought through.